Is It Cheap? Will It Go to Zero?

Steve, Tom and Jacob on a gloomier IMF, Brazil's election sell-off, who really gets paid when rates rise, why starting valuations matter most, and a listener question on Indonesia.

Five Things to Take From This Session

1. The IMF's severe scenario has 2027 inflation at 6% and global growth at 2%. It is a scenario, not a forecast, but the direction is gloomier.
2. Brazil's market sold off hard after Lula won a fourth term. Big sell-offs are where cheap prices come from.
3. Higher rates mean more interest paid to bondholders, and that money gets spent, which can feed the inflation the RBA is trying to kill.
4. Most investment success comes from asset allocation and rebalancing. Rule No. 1: starting valuations matter.
5. A systematic strategy works over time, not every time. Think like a card player, not a gambler chasing every hand.

I. Geopolitics

The IMF turns gloomier

The IMF warns that the world's capacity to absorb further shocks is weakening. Energy and government budget buffers are shrinking, and global growth is leaning more and more on the AI boom.

This is the severe scenario, so it is not set in stone. These institutions often have no greater insight than any well-informed individual, so take that into account. But the picture is definitely gloomier given what we see happening around the globe.

Read:IMF cuts growth outlook, warns world already drifting toward more adverse scenario Zawya →

Lula wins a fourth term, and markets take it badly

Lula beat Flavio Bolsonaro in Brazil's runoff, roughly 52% to 48%, after trailing in the first round. Markets had rallied on the expectation he would lose. A Tokyo-listed Brazil ETF fell nearly 15% in Asian trade, and the US-listed iShares MSCI Brazil ETF was quoted almost 20% lower in overnight trading.

Remember you are investing now to get more back in the future. That is why you can buy countries and sectors cheaply. You don't get rewarded for buying whatever other investors are buying. Not because there is certainty, but because you understand markets, mean reversion, valuation and probabilities.

Read:Brazil ETF tumbles nearly 15% in Tokyo after Lula's comeback runoff win investingLive →

Israel goes to the polls

Israel voted on 27 October. Exit polls had Likud as the largest party, with neither bloc reaching the 61 seats needed to govern alone. Official results are due on 4 November, and coalition talks could take weeks. It is one more source of uncertainty in a region already on edge.

Read:Israel election 2026: exit polls and full results Israel Hayom →

II. The Oz Economy

Who gets paid when rates rise?

We don't need to panic just yet. But here is something that gets very little airtime. The government finished 2025-26 with a $22.3 billion deficit, and every rate rise lifts what it pays in interest on its debt. That interest goes to bondholders, who are usually wealthier investors. They spend it back into the economy, which can fuel higher prices and inflation. That is exactly what the RBA is trying to stop. Go figure.

Read:Final Budget Outcome 2025-26 Treasury →

The pain lands on people with debt

The RBA seems determined to kill inflation by slowing the economy, and it will do that by hurting those with debt. Interestingly, most Australians now say they want lower house prices, including people paying off a mortgage and even property investors.

The rebuilding period

As we said, we are in the rebuilding period. A new steel mill is planned for Newcastle, the first in Australia in more than three decades, and it is set to run on renewable power. Guess whose steel exports we are replacing?

Read:New steel mill to be backed by renewables PPA ESD News →

III. What's Your Edge?

Most investment success depends on asset allocation. Or rebalancing, which we think of as asset allocation at a later point in time: asset allocation stage two.

Lots of strategies show what certain assets did over certain time frames. How a mix of gold, oil and shares did over 10 or 20 years, say. Backtest it and show the proof. But time frames can be cherry-picked, and a result that depended on where the market cycle or valuations happened to be is not much use going forward.

Get the forest right

Most of these things are not really random. We have a lot of data, and it reveals patterns in the broad sense without going into the minute details. If you want to pinpoint every top and bottom, you are missing the forest for the trees. Get the forest right and you will most likely do well. Think dynamically, over time.

The aim is to compound at high rates for long periods. That means not getting lost in whether the projected return is 6% or 6.2%. What you want to know is the difference between when it is 2 or 3% and when it is 12 or 13%. That information really makes a difference.

The trick is the time frame. We can't pinpoint the exact turning points, but we can say that a CAPE of 40 is danger territory, where we think returns will be negligible, or most likely negative once inflation, taxes and fees are included.

Rebalancing and volatility drag

Rebalancing also changes a strategy's return, because it depends on when you rebalance: daily, weekly, monthly or annually. That in turn depends on volatility, because volatility drag eats away at returns. In our view, volatility tends to be lower when shares are cheap and higher when they are expensive. Here is the rule of thumb.

The simplest example: a 50% gain followed by a 50% loss averages zero, but leaves you 25% down. Illustrative figures only.

IV. Your Question: John on Indonesia

There is no reward without risk. One trap is getting stuck in the current moment and forgetting that investing means putting money out now to get more back in the future. That is why we talk about asset allocation and rebalancing all the time. They are most likely the source of your returns, not picking the “right” ETF. You cannot expect outsized returns if there is no risk.

Our systematic approach is built on principles and evidence that it works over time, not every time. It is worth sitting with that, because many investors expect a systematic approach to work 100% of the time. That is why we talked on the podcast about thinking like a card player. No professional expects to win every hand. They look at the state of the cards and bet accordingly.

Is there risk in Indonesia? Sure, but there is risk everywhere. We believe the odds are in our favour, and we largely, though not completely, ignore the surrounding noise. We simply ask: is it cheap? Will it go to zero?

No two hands are alike, and Pakistan is not Indonesia, but our strategy treats them by the same rules. The judgement comes in the asset allocation and rebalancing. After the recent bad news and three down years, we think the odds favour a positive return from here. There may well be more volatility. We expect and accept that as part of the strategy, and as part of the reason it has outperformed.

Past performance is not a reliable indicator of future performance. General information only.

Thanks for the question, John.